A Guide to Preparing for Better Year-end Workers’ Comp Premium Audits
Who: Insurance Carrier
What: Premium Audit
Where: In-person or online
When: An audit is conducted within 60 days of the policies’ expiration date
Why: To reconcile costs at the end of the policy term – insureds may need to pay more or receive a credit
What Workers’ Comp Insurance Does
Workers’ compensation is a complex and closely regulated type of business insurance coverage that’s meant to protect employees, as well as employers, from costs that emanate from workplace injuries. With workers’ comp, employers pay the premiums, and insurers cover the workers against costs resulting from a workplace injury/illness, including lost wages. While regulations that apply to workers’ comp insurance can vary across state lines, most states require insurers to conduct workers’ comp audits.
The Basics of Workers’ Comp Premium Audits
What Is It?
A workers’ compensation premium audit is a review of the insured’s records that is conducted at the end of the policy term. The audit is meant to ensure that the business is paying the right amount of premiums for its workers’ comp policy. The audit may be done via phone, mail, or at the place of business, depending on the business type and the auditor.
Why Is It Needed?
The main objective of the audit is to enable a workers’ comp insurer to verify whether or not the estimates relied upon during the start of a policy, match the actual payroll, class codes, and business operations conducted during a specific period. The audit also evaluates whether or not the subcontractors hired during the policy period, had their own workers’ comp coverage. If not, the policyholder may be required to pay for the uninsured subcontractors’ coverage, as well. The main benefit of these audits is that they ensure policyholders don’t overpay for worker’s comp insurance.
Preparing for a Workers’ Comp Premium Audit
The payroll auditing process can be easy with proper preparations and a manageable plan. Preparing for your premium audit can help save time and costs incurred during the process. It also ensures that you only provide such information, as is required by the auditor.
Here is some of the information a policyholder should have at hand for a smooth and fast audit:
Payroll Records such as:
- Payroll journal, as well as the summary
- Checkbook (in case it serves as the only record book)
- Federal Tax Report (that covers the policy period)
- Individual earnings or State Unemployment Tax reports
- Overtime payroll records
Employee Records related to
- All employees’ job duties
- Time worked throughout the year
Cash Disbursement and Payments Records for
- Payments to sub-contractors
- Casual labor payments
Certificates of Insurance
- For sub-contractors used during the policy period
- For independent contractors
Description of Your Business Operation
- This is needed to validate classification codes
Experience Modification Worksheets
- This is used to ensure the auditor uses the right E-MOD
To avoid questions and surprises, the policyholder should verify that their payroll estimate is updated and in line with the changes in their business operations during the policy period.
Insureds Who Don’t Comply with Auditing Process
The consequence of non-compliance with the audit process can be dire and may result in:
- Cancellation of coverage: If an employer doesn’t cooperate with the auditor, the insurer may set their policy for non-renewal or cancel it.
- Monetary penalty: The insurer can apply the state’s approved monetary penalty if a business is considered uncooperative.
- Increased premiums on policy renewals: Once your policy is canceled, premiums to be paid on renewed policies could be 2 to 3 times higher than what was initially paid.
- Denial of new coverage: The insurer may alert the advisory organization in the jurisdiction, and the employer may be unable to access future coverage. If a business that’s been reported for non-compliance attempts to purchase a workers’ comp policy from a different insurance carrier, the insurer will check with the advisory organization and may deny coverage or demand a higher premium.
- Legal action – An insurance policy is a legal contract. Therefore, if one of the parties doesn’t adhere to the contract’s terms, the other party may take legal action against them. This means that an insurer can sue a non-compliant employer.
How PMC PayGo Can Help
Pay as You Go workers’ compensation policies can help your clients reduce exposure to audit balances. This is because with Pay as You Go policies, premiums are hinged on the actual payroll. Premiums are also paid/reported in real-time, compared to the estimated payroll used in traditional workers’ comp policies. Our PMC PayGo provides our clients with a simple, convenient, and cost-effective solution for paying their premiums in real-time and using their actual payrolls.